The Alexandria school system’s management of its capital improvement budget is “dysfunctional,” resulting in “significant internal weaknesses in monitoring ... financial transactions,” according to an independent audit report released late Thursday night.

The audit, commissioned after school administrators and city officials became aware late last summer of millions of dollars worth of unpaid bills and unauthorized change orders, also said upper-level managers were aware of the problems before they became public but did not correct them.

In addition, a facilities staff member ran his own contracting business, worked for a contractor that does work for the schools and hired that contractor to work on his own residence.

Superintendent Morton Sherman said in an interview Friday that he was “outraged” at the actions of some staff members, blaming the problems on “renegade, rogue employees” and two higher-level managers who should have known that something was awry in the facilities division.

Internal financial controls have already been tightened, he said, and he plans to forward the audit to the Commonwealth attorney who will determine if there is any criminal culpability.

The scandal, which has already cost at least four people their jobs, prompted severe criticism last week from the City Hall, which sends more than a third of the city’s budget to the schools. While the schools control the budget that the City Council appropriates, school officials have to abide by limitations, such as a certain amount being budget for particular projects.

“What I find very troubling is your statement that contracts were approved.... beyond their budgeted amount,” said vice mayor Kerry Donley, who is vice president of Virginia Commerce Bank. “That is against the rules of Accounting 101 — that’s called an overdraft, and that’s what we have here.”

Sherman said that the former facilities director and assistant director let some bills pile up in folders on their desks and never forwarded them for payment. In another case, they took a bill directly to the city for payment, resulting in City Council approving the payment of a bill before the School Board ever saw it.

“The odd part is, there’s no evidence of personal gain in that behavior,” Sherman said. “They just decided not to comply with policies they knew well.”

The schools did not exceed their overall capital improvement budget, Sherman said, and all major projects will be completed, although some repairs may be delayed until summer. He also blamed the schools’ chief financial officer, who resigned in January, and Deputy Superintendent Margaret Byess who “should have known” that something was awry, he said. Byess last week announced her resignation.

Sherman, who has held his job for three and a half years, said he bears no blame because as soon as he heard about the problems in late September, he halted all construction, and stopped payments and hired independent auditors to investigate. About $3 million worth of vendor contracts remain unpaid, and after an outside consultant verifies the work was done, the bills will be paid, he said.

The audit also said the schools kept multiple spreadsheets of costs and payments that did not match up, nor did they match up with the city’s paperwork. Contracts were not being reviewed by school lawyers before they were awarded and some spending for some projects was not recorded in the proper accounting period.

Patricia Sullivan covers government, politics and other regional issues in Arlington County and Alexandria. She worked in Illinois, Florida, Montana and California before joining the Post in November 2001.